Issue link: http://www.e-digitaleditions.com/i/58910
Law-Abiding Executive The The law can be a manager's best friend or worst enemy. One attorney maintains that b-schools must make sure their students achieve the legal literacy necessary to keep them on the right side of the law. by Hanna Hasl-Kelchner A ccording to some estimates, CEOs spend approximately 20 percent of their time dealing with legal issues; yet their formal business education typically leaves them ill prepared to deal with matters related to the law. Doing business without understanding the legal system is like driving a car without understanding all the rules of the road. You could be buckled up, obeying the speed limit, and paying the utmost attention to safety—but you're still headed for disaster if you're driving on the wrong side of the white line. Today more than ever, executives need a basic education in legal literacy, because the law touches virtually every decision a manager makes. The wrong decision—or the right decision made too late—can cause a small problem to mushroom to a crisis. Meanwhile, more regulation, more personal liability, more criminalization of civil wrongs, and more multibillion dollar verdicts significantly raise the overall cost of doing business. In the U.S., for example, the Sarbanes-Oxley Act is a recent regulatory buzz saw that has ripped through publicly traded companies. The law was adopted in an effort to restore investor confidence in the wake of the Enron and WorldCom scandals. Yet, rigorous deadlines for compliance with SOX and the high costs associated with it have left some executives so battle-fatigued they just want to leave all legal issues to the lawyers. But they can't; managers, not lawyers, are the frontline decision makers. The best course of action is to incorporate legal literacy into the business's deci- sion-making process. Legal literacy lets managers avoid predictable surprises and con- trol legal costs that could otherwise detract from their bottom line. Best of all, it lets them manage the company's legal risk instead of being managed by it. This leverages the law into a strategic competitive business advantage. It Starts with Education Traditional business educators focus on so many issues vital to commerce—account- ing, finance, marketing, operations management—but ignore the legal risks that can derail their students' success in all these business areas. Even worse, I have seen professors sometimes treat these legal issues with disdain. Take, for example, the finance professor who tells his students that insider trading laws undermine market efficiency. While that conclusion may have some mathemati- cal merit, it fails to respect the fact that markets serve society, and society values fair- ness. The use of inside information is unfair. To keep markets equitable, we have laws and regulations that set the standard for acceptable behavior. Another example is the accounting professor who says it's pointless to have laws discouraging accountants from preparing the books they will later audit because no firm would damage its reputation by acting improperly and risking a conflict of in- terest. That comment, which I heard prior to the Enron-Arthur Andersen debacle, ignores the realities of decision-making psychology. In the case of Andersen, the members of the accounting team were motivated to keep the client happy because they were experiencing the loss aversion associated with the fear of losing millions of 46 BizEd NOVEMBER/DECEMBER 2006